How did UG Investment begin?

Wang:: we were established in 1998, and are one of Taiwan's earliest hedge funds. I left the brokerage group at Yuanta Securities, together with a team of four others to start up UG Investment. We started off with $20 million in seed capital provided by a group of Hong Kong- and Singapore-based retired fund managers whom we had relationships with. We now have several hundred million dollars under management.

Can you describe the different funds?

Currently, we have three funds under management. The first one, established in 1998, is the UG Formosa Patriot Fund. This is a long-biased fund, because when we started off it was difficult to borrow shares and conduct arbitrage in the market. The fund has performed well, having gone up by 20% since its inception while the Taiwan index has fallen by 30% during the same period.

In May 2003 we launched the Taiwan Formosa Multi Strategy Fund, which mainly focuses on Taiwanese convertible bond arbitrage. The fund has been up 14% since its launch and has not suffered any draw down months. It took several years to launch this second fund, as we needed to feel comfortable with the shorting relationships we had built up with local brokers.

Our most recent launch was the China Convertible Bond Fund in December 2003. This fund has $50 million under management. With only 23 listed CB issues in China we have closed this fund to new investors for the moment, but will consider accepting new investments as the CB market expands.

What do you see as your competitive advantage?

We use local instead of foreign brokers to short our stocks. This gives us more opportunities for arbitrage and a cheaper cost of funding.

Most funds are only able to short stocks through foreign brokers who only keep inventory of the big names. Local brokers have access to smaller names, but typically only provide shorting facilities to retail investors.

We have made arrangements, together with our custodians HSBC and our auditors PwC, to access shorting facilities from local brokers. This provides us with many opportunities, particularly with the smaller names in Taiwan's convertible bond market where the limited number of players means that stocks are slower to be driven to their fair value.

Our costs of shorting are also much cheaper. For example, a 'round trip' in and out of a stock costs 120bps in commissions with a foreign broker and 60bps with a local broker. In addition, when dealing with a foreign broker you have to pay an interest cost of 3-4% when borrowing Taiwan names. With local brokers you earn an interest of 1% for the borrowed names you hold.

It has taken us time to develop this cheap and efficient short structure. It is not something that new entrants without an established track record can easily replicate.

What's in the pipeline?

At the end of this month, we plan to launch the Great Wall Absolute Return Fund, which will invest 50% in A-share stocks and 50% in China convertible bonds. We expect the per annum returns to be about 20%, with an associated volatility of about 10%.

We also have two more fund launches planned for this year. One will be a Taiwan equity long/short fund. The timing of this will be linked to Taiwan's inclusion in the MSCI developed country index, which will add further liquidity and momentum to the market, making the strategy more feasible.

The other fund will invest in undervalued assets in China. As there is no index protection in China we see significant opportunities in this space. The QFII experience that China is going through now is very similar to what happened in Taiwan before. As our team is made up of ex-brokers who were around when Taiwan's QFII experience started, we can draw on this experience to play the China market.

Do you think the renminbi will revalue?

I don't expect a sudden jump, but probably revaluation through gradual increments. The other option the Chinese government has is to raise interest rates, which I don't think it would do. To protect ourselves from revaluation, we are not investing in any US dollar-denominated CBs at the moment. If the renminbi revalues I think the Taiwan dollar and Korean won will follow its lead.

What is the investor profile of your fund? Have you been seeing growing interest from overseas investors?

About 60% of our investors are overseas institutions and 40% are high net worth individuals.

The interest from overseas funds of funds has picked up over the last year. Now that regulations around the region are easing, more hedge fund strategies are feasible and investors are definitely more interested in the region.

Previously, most investors were trying to gain exposure to the region through a broad Asian equity long/short fund. However, they are now looking increasingly for niche players.

The perception of Asia is also changing. Whereas investors traditionally looked at the region as Japan and non-Japan Asia, now Greater China is emerging as regional classification of its own.

Do you travel overseas to market your fund to investors?

We did go overseas two years ago for marketing, but we did not receive a great response, perhaps because that was not the right time.

Right now we are more focused on our investments, rather than on raising assets. I think initially overseas investors interested in China will focus on funds that participate in the H-share market before they are ready for funds like ours, which invest in the A-share market.

How do you structure your team?

We have 16 team members. We divide our responsibilities by product expertise. It is key to be familiar with the instrument you are using. For example the team member focusing on convertible bonds has over 10 years experience. We also have dedicated people focusing on underlying stocks, derivatives etc.

How do you conduct research on Chinese companies? Do you have any team members based in China?

No, all our team members are based in Taiwan although they visit China frequently. We actually find that it is easier to hire a professional in Taiwan who knows about the A-share market.

People who understand the Taiwanese market will also understand China quite easily as the two have shared a very similar history, starting off with an agricultural base, and expanding into light industries, petrochemicals and PCs.

What is your background?

I earned my MBA from Emory in the US. I've worked for Chinatrust Commercial Bank as a trader and Fidelity Investments as a fund manager. After QFII started in Taiwan I gained experience with a number of local brokerage houses including Yuanta, Core Pacific and President. The brokerage background gave me a strong knowledge of the derivatives product, which is now essential to my strategy when arranging swaps to short stocks.